Businesses, whether they are large multinational corporations or locally owned single proprietorships, operate in a business environment characterized by an ever increasing number of risks that arise in the ordinary course of business. These risks arise from such factors as the increasing globalization of markets, intensifying competition and the development and use of new and complex technologies. Such risks are inevitable, because most businesses cannot engage in any meaningful form of commerce without accepting these risks.
There are a variety of factors, both internal and external, which in combination make it important for corporations to implement a structured approach to managing risk. The factors may include both commercial realities, legal requirements and other non-commercial factors. Commercial realities may include, for example, global competition for capital which means that one goal of the officers and directors of a business is to increase shareholder value to enhance the appeal of the corporation to current and potential investors, thereby fueling growth. Other commercial realities include the globalization of markets which results in increased competition and more complex and substantial risks, where each local market within the global economy may create risks unique to that market. Additionally, the rapid changing and evolution of markets, including new competitors, new technologies, new customer requirements, the compression of response times, and the increased use of outsourcing add to the risks and the complexities of these risks faced by modern business entities.
In certain jurisdictions throughout the world, business entities are required by law to ensure that there is an appropriate system in place to handle risk management. Also, other entities such as insurance companies and capital investment firms may require that a business entity identify and manage risks before they will indemnify or infuse capital into the business entity. A final example of another entity that may require a structured risk management program is a potential long term customer. For example, before signing a long term purchase contract, the customer may want assurances that the supplier business entity will be able to fulfill the entirety of the contract. One manner of providing those assurances may be to show a structured approach to handling risk and dealing with consequences.